Several First-Time Requirements for Discount Rates and Complex Capital Structures
By Olga Averin, Prager Metis International LLC
The International Valuation Standards Council (IVSC) consists of over 120 member organisations in 47 countries, including the US. The IVSC develops, maintains, and updates International Valuation Standards (IVS) which cover the actions required during a valuation assignment.
Here we will highlight the most important provisions of the IVSC’s latest extensive updates in IVS 2020, which replaces IVS 2017 and takes effect 01 January 2020. Provisions include guidance on discount rates and new sections on complex capital structures.
Within sections 50.34-40, in section 50.34, for the first time, IVS will require documentation of the method used and inputs selected to derive discount rates. Section 50.36 is combined with Section 50.37, which lists methods valuers might employ. Section 50.36 will require valuers to consider the risk of achieving the forecast cash flow of the asset when developing the discount rate.
Complex Capital Structures
In sections 130.5-8 of the IVS 200 Asset Standards, effective 15 January 2020, for the first time IVS includes guidance for allocating the entire enterprise value across various classes of economic or control rights.
In section 130.5, IVS allows valuers to use any reasonable method to determine the value of equity or a class of equity, including: a) current value method (CVM), b) option pricing method (OPM), and c) probability-weighted expected return method (PWERM).
According to section 130.7, valuers should consider any potential differences between a “pre-money” and “post-money” valuation, particularly for early stage companies with complex capital structures. For example, an infusion of cash may impact the enterprise’s overall risk profile and its relative value allocation between share classes.
And finally, section 130.8. instructs valuers to consider recent transactions in equity, or a particular class of equity, and ensure assumptions used in the subject valuation reflect changes in investment structure and changed market conditions.
Olga AverinGGI member firm
Prager Metis International LLC
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Prager Metis International LLC is a top accounting firm providing a full range of accounting, audit, tax, and advisory services to domestic and international clientele in a wide range of industries. With 17 offices worldwide, they have a level of expertise and a unique global presence that makes their clients’ world, worth more.
Olga Averin is a Partner at Prager Metis. Her areas of concentration include business and intellectual property valuation, damage loss calculations, and forensic examinations. She has been involved in valuations for matrimonial dissolutions, shareholder disputes, estate and gift tax purposes, and buy/sell transactions and has testified as an expert in the Supreme Court of New York, The Federal Court, Eastern District of New York, and the International Court of Arbitration.
Published: Litigation & Dispute Resolution Newsletter, No. 12, Spring 2020 l Photo: Denis Feldmann - stock.adobe.com